In simple terms, the value of any product derives from the natural resources and work invested in producing or providing it. As we will discuss natural resources and their relation to value in a separate chapter, the focus here will be on work. Money is supposed to be a monetary (quantified) expression of value. The trouble is that in the present system there is an aberration: money can produce more money by ways unrelated to work – and faster! Capital (in the form of stocks, land and rentals) usually generates wealth faster than the rate of economic growth. Wealth not only tends to accumulate, but to become increasingly concentrated at the top, as those with more capital are able to earn a higher rate of return on their investments. So, the system, left to itself, generally produces an ever-growing degree of inequality, in particular between those who do no useful work (as their money works for them) and those who do. In short, inequality and the separation of value and money are linked, so we will address this separation by addressing inequality.
Hard-core capitalism and an egalitarian society are not compatible – if we want a more egalitarian society, we need to help the system evolve (Piketty, 2014, p.18). But, why does inequality matter? It matters for several reasons:
- Inequality is not good for the economy. A more equal distribution of money generally means more spending, which stimulates production or services; this, in turn, creates employment, thus producing a virtuous circle. Spending by the wealthy mostly benefits those who are also well-off and very few others – when inequality is high, money goes into assets and stock-market investments rather than on spending that contributes to the real economy. The economy usually booms in periods of low inequality (as in the 1950s and 1960s in the US, for example). That does not mean that low inequality causes the economic boom (there are other factors at play), but it is certainly not a hindrance and is very likely one of the contributing factors. Based on the evidence of a strong link between inequality and growth, the leading economic think-tank the Organisation for Economic Cooperation and Development (OECD) published a key report in 2014 dismissing the concept of trickle-down economics. It concluded that policies that would help to limit or, ideally, reverse the long-term rise in inequality would not only make societies less unfair, but also richer. Rising inequality is estimated to have knocked more than 10% off growth in Mexico and New Zealand, and between six and nine points in Italy, the US and the UK. IMF research from 2014 concludesthat “redistributive policies have a positive effect on countries’ economic output.” In her 2011 inaugural speech as Managing Director of the IMF, Christine Lagarde expressed the same view.
- Inequality is also not good for the economy because it has a negative effect on education as well as on incentives for innovation. This is because labour is cheap – as already shown, one of the major factors driving the Industrial Revolution and capitalism itself was relatively expensive labour.
- Inequality creates a sense of unfairness (even when they are doing relatively well), which has a negative effect on social cohesion. Conversely, greater equality fosters a sense of fairness, which in turn contributes to greater motivation and better ‘work ethics’. Just ask yourself, do you work better when you think that you are treated and paid fairly? If you feel that you are treated unfairly, it will not only affect you but your productivity too – and there are always ways to cut corners that managers cannot control. Moreover, individuals are more likely to rally together in a time of crisis if they perceive society as fair.
- Economic inequality translates into inequality of political power: the increasing gap leads to an erosion of democracy as an increasingly small number of people (such as oligarchs or those leading oligarchic corporations) have ever-greater power.
- Inequality also erodes meritocracy. It is true that inequality can be an incentive, but only up to a certain point, after which it becomes a disincentive. If the odds are against you progressing, why you would even bother to try? We need truly equal opportunity to have proper meritocracy. In unequal societies, many talents are wasted, and many incompetent people are in senior positions.
- Inequality also destabilises society as a whole, as it usually leads to an increased crime rate and sometimes even to unrest. There is strong evidence that inequality affects community life and social relations, mental health and drug use, physical health and life expectancy, obesity, educational performance, teenage births, violence, crime rate and imprisonment, as well as social mobility (Wilkinson & Pickett, 2009, p.229). This is not only an ethical point but economic one too. For example, if fewer people are sent to prison or have poor mental and physical health, more people will be earning and paying taxes. Astonishingly, most American states spend now more on prisons than they do on education.
- Inequality is not good even for rich people. Wealth brings two feelings: anxiety (about losing it or being overtaken by somebody else) and pleasure (derived from the material comforts it makes affordable). However, the rich quickly get used to such pleasures – one may really enjoy travelling business class for the first few times, but after a while the novelty wears off and, if the airline runs out of your favourite peanuts, your annoyance will easily eclipse the joy. So, the joy and pleasure steadily decrease (otherwise known as ‘diminishing returns’). Going back to economy class though, becomes less and less tolerable, thus increasing anxiety. So, the longer one is wealthy, the less joy and the more anxiety that wealth brings. Not surprisingly, a recent survey showed that rich people are not actually that happy, because they constantly worry about their wealth and security. There are also other more subtle causes of unhappiness. One participant said that nobody ever buys him presents anymore because everyone assumes he already has everything. The well-off middle class can suffer from so-called status anxiety – engaged permanently in a rat-race and competition with their neighbours (who has a bigger house, better car, etc.). In more egalitarian societies, these pressures and anxieties are less prominent and competition is less fierce. Furthermore, it seems that greater equality is not only psychologically beneficial but physically too: the wealthiest people in societies with narrow income gaps tend to live longer than the wealthiest people in societies with large income gaps. (Dietz & O’Neill, 2013, p.93). If all this is the case, why don’t rich people simply give up their wealth and join the rest of us? Some actually do, but most do not: besides the pressures and anxieties, wealth is also addictive. Luxuries such as yachts, jets or diamond necklaces are, in fact, quite boring; the real pleasure is mostly derived from showing them off. In addition, wealth can provide power. Both showing off and power can be hugely seductive.
In conclusion, reducing inequality is not just an ethical issue – it has real economic and political consequences: Angel Gurria, the Secretary General of the OECD, said “This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustainable growth. Countries that promote equal opportunity for all from an early age are these that will grow and prosper.”
Egalitarianism is sometimes resisted because it is perceived as sameness or uniformity. Everybody is the same, with the same cars, houses and clothes (some may still remember the identical grey suits that all Chinese men used to wear, including the politicians). Such an image understandably invokes feelings of oppression and boredom, and is often used in fiction to describe a dystopia. The ideal of the synthesis economics though, is not the extreme of complete equality but an ‘equability Goldilocks zone’ – not too equal and not too unequal. The differences should never be allowed to go as far as to endanger the fabric of society and be counterproductive to the economy. As French economist Thomas Piketty puts it:
Our democratic societies rest on a meritocratic worldview or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and efforts than on kinship and rent. This belief and this hope play a very crucial role in modern society, for a simple reason: in democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well. (Piketty, 2014, p.36).
Equal opportunity is a great idea but it cannot stand on its own – to make it really possible, optimal living standards need to be in place too. If one runner has good running shoes and another has shoes full of holes, or no shoes at all, the latter is obviously disadvantaged, even if they are capable of running at the same pace. And let’s make it clear, inequality is not inevitable. It is a policy choice. In Namibia for example, which on gaining independence in the 1990s inherited the highest level of inequality in Africa, the government has managed to systematically reduce the gap between rich and poor and more than halve the poverty rate from 53% to 23%. The key factor in its success was the investment in health and education (it has the world’s second-highest percentage of budget spend on education). With the same end, Mongolia secured a system of collective bargaining, and Malawi introduced one of the world’s most progressive tax systems. As this part is about money, we will consider next some financial mechanisms that can secure real equal opportunity and keep inequality in the Goldilocks zone, starting with taxation.
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Do you like paying taxes? Our guess is that in the best possible case you feel that it is your duty to do so, and if you do it grudgingly, you are not alone. Yet, taxation is one of the most important inventions that enable society to function. There is not and never has been a country that does not have some form of taxation. To bring home its importance, let’s imagine we live in a country that does not tax its people. The first thing that usually comes to mind is being able to enjoy more money, but we tend to forget the other side of the coin, which is that the whole fabric of society would disintegrate. In fact, we could not have anything that could be called society, let alone a state. But surely there have been, and still are, tribes that have never heard of taxation? Not really. True, they may not have formal taxation as we do since they don’t use money, but members of such groups still contribute in the form of labour or goods (such as grain) for some common cause. The form of taxation we are familiar with arose when money appeared and will exist as long as money is around, as taxation is absolutely necessary for any form of social-economic organisation. Still, a resistance to paying taxes needs to be addressed as it is so deeply imbedded in all of us. Let’s do so by bringing up some common arguments against paying taxes:
The state doesn’t have the right to take away what I have earned. It is mine! Education, health services and a social safety net (help received when one falls on hard times) are usually brought up against this argument, but this can be countered: “My parents paid for my education, I have always had private health insurance, and I have never claimed benefits, so why should I pay taxes?” Well, what about the police, the fire brigade, the army, and the political apparatus that have enabled you to have all these advantages in life without having a Bolshevik revolution? How about roads and other infrastructure that enable you to run your business smoothly? What about parks, city centres and other public spaces? What about a system that is necessary to negotiate with other countries so that you can export your products? An answer to this could be “I could pay for private roads, private police, a private army, and private politicians, just as I pay for private education and health care”. Let’s assume that you can indeed afford to pay for all these things. Let’s also assume (a big assumption) that this would be a less expensive option than paying taxes, and that everybody else is doing the same. You will still need to:
- Pay levies to others as soon as you leave your metaphorical front door.
- Make alliances with others (e.g. to have an army or build roads), which would involve paying ‘taxes’.
- Make sure that those you need to work for you, and who cannot pay for all these things, are able to work for you, which means you will have to pay for them (including, possibly, for their training, health insurance, etc.).
- ‘Chip in’ for shared goods and services that cannot be compartmentalised.
The fact is that society needs you and you need society. There is no way around it. It is impossible to have isolated islands and have a society at the same time. Very few would actually go so far as to object to paying taxes at all. However, there are other objections to paying taxes that relate to how much we pay and for what.
I object to paying taxes because I disapprove of what my taxes are used for. This argument is stubborn and widespread because it is plausible. People on all sides of the political spectrum use it, although their justifications differ: for example, those on the left don’t want to pay for arms and warfare, while those on the right don’t want to pay for the ‘scroungers’ and for welfare. We believe that the best way to adequately respond to this objection and change our attitudes towards taxation is democratising the tax system. One way of doing so is to give everyone the opportunity to choose how their tax will be used. The tax return form could have several categories, and taxpayers would indicate which percentage of their tax would go to each category. This could bring many benefits: people would be more willing to pay taxes, they would be more engaged, and they would have a chance to directly participate in budget allocations, making this a huge step towards greater democracy. A concern could be raised that in such a situation the rich would have more influence. It seems only fair though that everybody has the same right to allocate their financial contributions irrespective of the size of these contributions. Also, such an influence would not be disproportionate overall as there are always far more people who are not very wealthy than those who are. A cap on maximum earnings, which we’ll discuss shortly, should further mitigate such concerns. What is certain is that people would be more willing to pay taxes if they had a say in how they were spend. Findings from Brazil show a 33% increase in local tax collection when those who are paying have direct input on how their money is spent.
Politicians are too incompetent to be trusted with our money: This is more an excuse than a good reason against taxation. The point of democracy is to be able to vote out politicians that are deemed incompetent. It is true that sometimes politicians get it wrong, but not all of them are incompetent all the time.
I object to how much I pay. Why should I pay more than those who earn less? This is the issue of progressive taxation, which is already in place in most countries. For example, in the UK, you can earn up to a certain amount without paying any tax. After that, you pay at a basic rate of 20%; reach the next threshold and you pay 40%; beyond the next one you pay 45% (in Scotland there are more bands and slightly different rates). What are the justifications for this? One is that if you are earning a lot of money, you should pay more, as you are in a country that enabled you to earn a lot of money. Think about Bill Gates: what would have happened if he had been born in Zimbabwe? It seems fair that those who had the good fortune to be born in a society that enabled them to become wealthy should make a greater contribution to support such a society. Furthermore, wealth cannot be fully justified by personal merit – it is often, at least partly, due to luck and progressive taxation counters this in order to get everybody closer to the ideal of equal opportunities. Finally, allowing an inequality gap to widen too much is not good for the economy and society as a whole, as we have seen above. Still, it may be worth considering a possible caveat to this in the case of individuals who make unique social contributions. For example, Tim Berners-Lee, who invented the World Wide Web, made such a great contribution to society that whatever he earned would seem justified (he actually didn’t make much money from the web, as he made his invention freely available, but this is beside the point). This is an argument that Ayn Rand used, and for once is not completely off the rails as her ‘philosophy’ usually is. After all, we don’t want to discourage exceptional inventors, scientists, artists and the like. For this reason, we suggest that tax relief should be available for individuals, where it is justified by their achievements and social contributions, and also by any special needs that they may have: for example, they may not be able to go to a local park or supermarket, as most people can, without being bothered by others; they may even need bodyguards and security. More specifically, a virtuoso musician may need to have space in which to practice that is shielded from any outside noise. All these may be quite expensive. That said, we should bear in mind that such people are exceptions. The vast majority do not belong to this category. Take those who make huge sums on Wall Street or in the City by gambling with (usually) our money. The only real contributions to society that they make are through paying taxes. So, there is no need for them to be excused or receive special treatment.
High taxes will hamper productivity as they will reduce motivation. Actually, psychological research shows that money is not a good long-term motivator. In fact, larger financial incentives lead to poorer performance on almost anything but the most rudimentary tasks. People perform best when they are given the freedom to direct their own work, the opportunity to improve their skills, and when they feel that their work has meaning and purpose (Dietz & O’Neill, 2013, p.93). These are greater motivators as we don’t get accustomed to them as we do to money.
High taxes for the rich will slow economic growth. This is a frequently used trope that blatantly ignores all the evidence to the contrary: inequality actually slows economic growth. In 2012, Alan Krueger, chairman of President Obama’s Council of Economic Advisers, concluded that there was “little empirical support [in the US] for the claim that reducing the progressivity of the tax code has spurred economic growth, business formation or job growth.” And this does not apply only to the US. An analysis of data across 18 OECD countries disputes the claim that low taxes on the rich raise productivity and economic growth. Our economy may be growing more slowly because we are taxing the rich too little, not too much. As already argued, redistributing income stimulates the economy more because that income is more likely to be put back into the real economy. To put it simply, 99 people are likely to buy more pairs of jeans than one person. As a result, according to Mark Zandi, chief economist for Moody’s, a dollar in various tax cuts would add between $0.27 and $1.29 to economic growth, while a dollar in unemployment benefits gives the economy a boost of $1.63 and a dollar of food stamps $1.73. Even the IMF acknowledges that higher income tax rates for the wealthy would help reduce inequality without having an adverse impact on growth.
Taxing the rich would not raise much money: This is another oft-heard red herring. Of course it would. If only the richest 400 families in the US were actually paying the statutory rate of 39% (at least until 2018 when it was slashed to 25.7%), an additional $500 billion would be raised over 10 years, putting a substantial dent in the deficit. The Institute for Fiscal Studies report also indicates that the tax system reduces inequality. So, how much should top earners pay? Nobel laureate Peter Diamond at Massachusetts Institute of Technology and Emmanuel Saez at Berkeley estimated that the optimal top tax rate that would maximize revenue without slowing economic growth is 73%. This may seem pretty high, but it is worth remembering that in the 1950s and 1960s, at the time of greatest economic growth and prosperity, the highest earners in the US (those earning over $2 million), were paying 91% tax (with an even higher figure in the UK). Ah, but won’t taxing the rich make them leave the country to places where they would pay less? Actually, the data indicates that taxation is very low on their list of priorities when they decide to move. There are other factors that matter more (the quality of life, social and family ties, education for children, etc.). There is little doubt that the gains from higher taxation would be far greater than the potential loss of revenue because of any resulting emigration.
~ What we can do now ~
Democratised taxation is a new idea, but it has a potential to gain traction fast. We can start talking about it to bring the democratised taxation into the public domain. Then we can lobby at least local authorities to pilot it. Let’s be clear that technically this is not a big challenge – some local authorities already publish where their money is spent. All they need to do is let us decide. If some local authorities adopt this model, it is likely to spread quickly as such a move is bound to be popular with taxpayers (and therefore voters).
Let’s now consider other types of tax, besides income tax.
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This is a thorny and emotional issue, but inheritance tax must be addressed as it literally breeds inequality; not only does it contribute to, but it also perpetuates, an increase in inequality. The Institute for Fiscal Studies (IFS) in the UK found that the largest inheritances would in the main go to those who were already well off. To quote Piketty once more:
Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present)… wealth originating in the past automatically grows more rapidly, even without labour, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance. (2014, p.36).
Nobody in their right mind, though, would advocate taking everything that has material value away from the descendants and this wouldn’t be completely fair (e.g. somebody who has grown up in a large house and must suddenly move into a small apartment would actually be disadvantaged in comparison to someone who has lived all their life in a small apartment and is used to this). On the other hand, having no inheritance taxation would be in conflict with the meritocratic principle that one should be awarded according to one’s contributions. The synthesis economy is unsympathetic towards any form of parasitism, and maintains that everybody should contribute according to their abilities – which is why inheritance is an issue. Researchers at America’s Syracuse University found (with appropriate caveats) that “an inheritance received by a family reduces the probability that both spouses will continue to work, and increases the probability that both will retire.” Much earlier, Andrew Carnegie, the great Scottish philanthropist, warned: “The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.” Even Adam Smith supported a tax on wealth inherited by children “who have got families of their own, and are supported by funds separate and independent of their father”.
We think that the right balance would be achieved if we make sure that beneficiaries are not deprived of what they need, but cannot inherit so much so that they can live wholly off their inheritance, thereby making no social contribution. This is not about dispossessing descendants but precluding them from becoming social parasites. For example, a beneficiary should be able to keep the house they live in as their inheritance (tax free or nearly free). However, if they inherit two houses, one should be taxed in order to prevent them from being able to make a living out of renting or selling it instead of making their own contribution. In this way, the donor has some control of what will happen with their wealth after their death: they can self-distribute the wealth by leaving it to a greater number of beneficiaries who are in need and by doing so reduce or avoid future inheritance tax. After all, inheritance tax is nothing else but a redistribution on a large scale (theoretically to all the members of society).
What about cash? Again, progressive taxation is recommended and even setting a limit onto the amount that can be inherited to prevent a beneficiary living off the interest or other investments of that money. An objection may be raised that individuals who had not worked beforehand (as they were supported by the donor while they were still alive) would find it difficult to suddenly have to find a job. This can be mitigated by another way that a donor could have control over channelling their wealth. The excess wealth that would otherwise be taxed after their death could be used to invest in or start a social enterprise, charity or a private business. An offer of employment to the beneficiaries could be a condition attached to it. Although they will not have control over the money, they will have a guaranteed job. What sort of job would depend on their abilities, skills, experience, education and so on. This, of course, would put them in a preferential position in relation to other potential candidates for the same post. However, this is justified because the post would not even exist if the donor did not decide to invest in or start that enterprise. The beneficiary would of course be fully responsible for holding down their job and could lose it if they do not perform to the same standards expected from other employees.
~ What we can do now ~
We can support the reform of inheritance tax along the lines suggested to minimise any resistance to this tax. As this model allows benefactors to remain in control and even avoid this taxation by spreading their money or investing it in socially useful activities, it can go a long way to meeting the objection that inheritance tax is just a second taxation (which it is not anyway, as the recipient not the donor is taxed).
Tax on assets (such as shares and properties)
This too might be perceived as a double taxation, but such tax is justified as shares and property increase in value, and, in fact, ‘earn’ income. That income is new and therefore can be taxed. Why should new income derived from work be taxed, and that accrued without work not be? This move is also necessary as buying assets can be, and is, used to avoid paying taxes. Property or shares become income only when they are sold though, so they should be taxed at this point. Also, the contribution principle (minimising social parasitism) being the main driving force behind it, such a tax should start above a certain threshold and be progressive (as is the case in Spain). A tax on assets is difficult though, as some are hard to trace. So, a financial registry (a record of financial wealth such as bonds, derivatives and equities) would be needed. There are already land and property registries, so there is no reason why a financial registry cannot be set up.
These taxes are justified as nobody can run a business without utilising what is provided by society, such as the infrastructure or a trained workforce. This is well known to anyone who has ever been involved in starting or running an enterprise in a society where the infrastructure and education are insufficiently developed. Cheap transport and other public services, good roads, and the availability of a trained and healthy workforce are all essential to ‘making money’. Furthermore, public funds are also used to invest in research and development that is beneficial for businesses – the US government, for example, funds 50% of all R&D in the country. It is not surprising that there are already a number of such taxes: Corporation Tax is levied on limited companies’ taxable income or profits (e.g. 19% per cent in the UK). Value Added Tax (VAT), usually around 20%, is a tax on the final consumption of certain (non-essential) goods and services in the home market but is collected at every stage of production and distribution. Businesses may have to pay stamp duty for transactions on the transfer of land or interests in land, grants or assignments of leases, and transfers of chargeable securities such as shares in companies. Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) an asset that has increased in value. Nothing much needs to be changed here except reducing the level of corporate welfare: for example, in 2012–13, the US government spent £58.2bn on subsidies, grants and corporate tax benefits and took just £41.3bn in corporation tax receipts. Having socialism for the wealthy and brutal capitalism for everybody else is not only unfair, but unsustainable. Scrapping tax breaks and similar actions could easily be done if there was the political will – in other words, if politics didn’t depend so much on wealthy donors (see the chapter on politics). Which brings us to an issue that needs to be considered separately – tax avoidance.
Tax avoidance is one of today’s greatest (economic) injustices, as it is only available to the wealthy. It also costs nations billions of dollars in lost revenue. For example, in the UK, the gap between the corporate tax that companies should pay and the tax that they have actually paid has reached about one-third of the total income from corporate tax. The biggest single culprit in this respect is tax havens. According to research by the campaign group Tax Justice Network, approximately $21-32 trillion of private wealth is held offshore. The group estimates that annual tax losses from multinational corporations are about $500 billion and from undeclared asset income are nearly $200 billion. Other estimates put the total of all global wealth being hosted in tax-havens as between one-third and one-sixth (Boyle & Simms, 2009, p.137). Half of all global trade is now routed via offshore accounts to avoid tax. And, of course, much of the capital flowing through the offshore circuits is engaged in speculative activities rather than being committed to long-term investment. The impact of such vast sums moving rapidly in and out of equity and currencies markets, without effective multilateral regulation, has created a global economy that is probably beyond the control of nation states. Closing these havens down would require much greater international cooperation and political will than has been shown to date, but it is not impossible and there are already prominent calls for this to be done. Former UK Prime Minister Gordon Brown’s petition for this very purpose was signed by more than a million people in a very short time. A more concrete way of addressing this issue is putting pressure on the tax haven countries and regions. The US, for example, did that with Switzerland, by threatening to close Swiss banks on its territory (but it is very coy with its own state of Nevada, which is becoming one of the biggest tax havens in the world). This would not in itself be sufficient, though, as not all heavens are so interdependent. Another, more efficient, way would be to legislate that companies need to be registered and pay taxes either in the country where they do most business or proportionally. For example, Apple managed to largely avoid paying taxes in the UK and the US by nominally running its operations from Ireland. As it transpired in the leaked Paradise Papers, when the EU forced Ireland to close this loophole, Apple promptly moved the firm holding most of its untaxed offshore cash to Jersey, another tax haven. There is a building in the Cayman Islands (the first tax-heaven) that houses the ‘headquarters’ of more than 1,000 companies! The above suggestion could make a big difference.
Tax havens may be the most prominent means of avoiding tax, but they are far from being the only way. There are many other devices used, such as shell companies and trust funds, equity swaps, real estate borrowing, non-domiciled status, beefing up business expenses, etc. There are armies of lawyers whose only job is to outsmart regulators and find such loopholes. Some schemes are quite complicated and cannot be individually addressed here. Generally speaking though, there are several common-sense steps that can be applied to all of them: tighter regulations; making illegal any activities that have the sole intention of tax avoidance or helping tax avoidance; proportional penalties that can be a real deterrent; and, above all, introducing greater transparency. For example, shell companies could be required to disclose the names of their real owners (in fact, the Incorporation Transparency and Law Enforcement Assistance Act already exists, but nobody acts upon it). Creating a global register of who owns what, as suggested by the economist Gabriel Zucman, would be another step that would clear the murky waters of tax avoidance.
~ What we can do now ~
It is not so much the case that we lack legislation and regulations, but rather that we don’t show the will to follow them through. It is no secret that those who hold public office balance the support of the wealthy with the support of their electorate. We can tip that balance in favour of less complacency by contributing (via social media, for example) to a shift in mentality from seeing tax avoidance as socially acceptable to seeing it as something reprehensible and shameful. Also, we can join and support organisations such as the aforementioned Tax Justice Network. They have powerful enemies and are badly in need of support.
A welfare system may include helping the elderly, those on low incomes, those with children and those with disabilities or illness, but the main focus here will be unemployment benefit, as it is the most challenged of them all. State-sponsored financial support to those out of work is a contentious issue that divides those at opposite ends of the political spectrum. From the social synthesis perspective, unemployment benefits are justified, in general, for several reasons:
- Ethical: just as it would be unethical not to help a drowning person if one can, it is also unethical to leave those out of work to die on our streets from starvation, cold, or a lack of basic medical care – which is what it would come to without any social provision for such people. After all, even those incarcerated are provided with food and shelter – surely the unemployed are not less worthy?
- Social: as is well documented by Wilkinson and Pickett in The Spirit Level, destitution has enormous social consequences. Not surprisingly, it can also lead to an increased crime rate and ultimately even to unrest.
- Economic: social security actually benefits the whole of society and the economy, as it means the purchasing power of the unemployed is not completely eliminated. In fact, it prevents the vicious circle of unemployment leading to fewer products being sold, which then breeds further unemployment, and so on. In other words, social security can cushion the blow of a ‘bust’ in the real economy.
- Industrial restructuring: welfare makes restructuring easier as workers are not forced to cling on to their jobs. Of course, other factors play a part in restructuring, but there is no doubt that a good welfare system can make the process faster and smoother, which can be crucial when whole industries need to be restructured.
- Social mobility: there seems to be a strong correlation between social mobility and welfare provision. For example, Scandinavian countries have greater provision than the UK, and the social mobility in these countries is greater than in the UK. In turn, the UK has greater welfare provision than the US – as social mobility too.
- Welfare provision contributes to individual freedom For example, it is not unusual for a parent and their children to remain in an abusive relationship for financial reasons. If there is welfare support, they can have a choice.
For these reasons, very few have been completely against this kind of provisions. The eminent American economist and Nobel prize winner Paul Krugman remarks:
In the past, conservatives accepted the need for a government-provided safety net on humanitarian grounds. Don’t take it from me, take it from Friedrich Hayek, the conservative intellectual hero, who specifically declared in The Road to Serfdom his support for ‘a comprehensive system of social insurance’ to protect citizens against ’the common hazards of life’ and singled out health in particular.
Adam Smith too was in support of welfare. Attacking the welfare system as a whole is a relatively new phenomenon. Still, this needs to be unpacked further, as those on the economic right pick on some aspects of the system that can be perhaps justifiably criticised and then make generalisations. Such arguments encourage beliefs that people abuse the system and that those on the dole (unemployment benefit) are lazy scroungers, and conclude that it is unfair that some people who do not contribute to the society live off ‘my money’ (via taxation). This is fuelled by imaginative claims and comments, such as that there are families where three generations have lived on the dole and that working people “see their neighbour on benefits pull the blinds down when they put theirs up to go to work”. Even if these claims are largely unfounded, and taking advantage of the welfare system may be rare, the issue they raise needs to be addressed in order to minimise resentment that some happily exploit. Furthermore, there is no doubt that being out of work for long is not good for society and not good for the unemployed either, as it is easy in such circumstances to feel marginalised and fall prey to unhealthy habits.
A radical solution to welfare is an idea that is gaining momentum: so-called universal basic income, whereby all citizens receive a regular, unconditional sum of money independent of any other income. We do not consider this helpful, for several reasons: such a scheme would foster a sense of unconditional entitlement, those who don’t really need it would still receive it, and it would be a huge burden on the state, adding to inflationary pressures. It comes as no surprise that, after a limited two-year pilot trial that started in January 2017 (making it the first European country to test universal income), the Finnish government has decided not to expand the scheme. A study by the OECD said that income tax would have to increase by nearly 30 per cent to fund a basic income. It also argued that basic income would increase income inequality and raise Finland’s poverty rate from 11.4% to 14.1%.
Something else is suggested instead, based on the same principle of contribution applied to those on top (everybody should contribute according to their abilities): conditional unemployment benefit arrangements. In a nutshell, a necessary minimum for normal life should be available to those out of work – but in return, those who receive financial help would need to make some socially useful contribution. The question may be raised, “would this not open the door for the state to abuse the unemployed by paying them less than the going rate? If there is socially useful work to be done, why not simply employ them?” To meet this objection, those who receive social benefits should cover only activities that require occasional (e.g. seasonal), casual or temporary work, as well as work that is not absolutely necessary, but is socially beneficial. There is plenty of such work. For example, your local park may benefit from a few extra benches being made or a general clean-up, but your municipal authority has no money allocated for this. Those receiving financial assistance could do this. Such activities would also have the additional benefits of keeping those who are receiving subsidies engaged and reducing resentment towards them, thus improving integration in both directions. A further incentive for the recipients would be the opportunity to learn, get exercise and improve their professional and social skills, thereby increasing their chances of finding employment. It should be clarified that the state should not have a monopoly on providing this work; the unemployed themselves can be proactive in finding it (e.g. volunteering for a local charity). Applying for permanent jobs, as well as caring for children (one’s own or somebody else’s), the elderly, or people with disabilities, should also be considered socially useful work.
But what if some people don’t want to engage with any of this – for example, they don’t turn up to work, or they cut corners? Existing schemes in San Diego, California and Fort Worth, Texas indicate that the participants are by and large conscientious (sometimes even more so than employees, it is claimed). Nevertheless, this is an issue that has led to the closure of some pilot projects in the past and needs to be considered. To this end, various levels of social help are suggested. In the first instance, those who fail to demonstrate sufficient responsibility may be switched to receiving so-called ‘food stamps’ instead of money. The food stamps can be exchanged only for necessary goods such as food, toothpaste, toilet paper, etc. We need to recognise that some personal responsibility is required for spending too. Food stamps are already common in the US but rejected in Europe as demeaning. This objection would not stand, though, if this switch only applied to those who refused to contribute. Under this scheme, they would always have a choice – and if those on food stamps subsequently show more responsibility, they can again start receiving benefits in the form of money rather than food stamps.
This level cannot be the bottom line though. Some who receive food stamps may still refuse to engage in a pro-social manner. In such cases, rather than food stamps, they should receive all the basic necessities such as accommodation (if they need it), food, and so on, directly. This may involve providing living quarters or shelters with common eating and socialising areas so that they don’t feel isolated. In this way, their existence is not endangered but exercising their agency is limited, again, until they are prepared to take more responsibility. Communal living may also help to recognise and address any social or psychological issues that such individuals may have. But what if they are disruptive (i.e. they bring in drugs and alcohol, harass others, etc.)? Such incidents would usually be in breach of regulations and sometimes even the law. So, as a last resort, they could be confined, if legally and otherwise justified, to rehabilitation centres or detention centres where they could receive necessary care and support.
This system is designed to maintain intrinsic and extrinsic motivation to be part of and contribute to society, which many people who are unemployed and on benefits lose. To achieve this, it is important that those involved with this scheme are aware that at any point they can move up through these levels and that they will be supported if they show interest in doing so. The investment is justified as it turns asocial behaviour into contributory behaviour, and this provides returns in multiple ways. To put it simply, welfare spending, including unemployment benefit, should not be seen as a form of consumption but as an investment.
In most of Western countries, the biggest chunk of welfare by far goes to pensioners, and this is likely to increase with an ageing population. Pensions are becoming a huge problem for the state and for the private sector, so some radical solutions may be needed. One such suggestion would be to abolish the retirement age altogether. Let’s clarify this proposition before you turn away in rage. What we mean is that pensions should be fully incorporated into the welfare system. So, everybody who is less able or not able to make further contributions should receive social benefits according to their needs, but not based on some arbitrary and unsustainable age threshold. This would have a number of advantages:
- Many people do not want to retire, and perhaps with a good reason. It is instructive that the death rate increases disproportionally after retirement even when factors such as health, education and finances are taken into account.
- Many people are capable of, and willing to do, some work after the age of retirement, while supporting an ever-increasing number of pensioners will become next to impossible and a huge burden on future generations.
- Retirement ages are arbitrary anyway and differ from country to country.
- Pension funds contributed to the gargantuan growth of corporations and the financial sector, as well as to a large proportion of the population being over-reliant and dependent on the stock market. This is one of the main reasons why in the US, Wall Street cannot be allowed to fail.
This does not mean that the elderly should be forced to work until their grave. People can move gradually from full-time to part-time jobs depending on their abilities, and at a certain point stop working altogether. As above, any socially useful activities (even if does that do not involve actual employment) should qualify the elderly for receiving financial help – for example, taking care of children (so their parents can go to work), voluntary work, passing their skills to the next generation, and even further education or training that contributes to personal and social development. Currently, we too often condemn the elderly to a life of isolation, loneliness, boredom and a sense of being useless. This does not need to be the case. In addition, adopting the above suggestion would increase the sense of security and self-reliance among the elderly. In turn, that would reduce the need to lean on one’s off-spring – which could contribute to stabilising population growth. With provision for the retired shrinking, this issue is becoming increasingly relevant even in the West. We overheard a young teacher saying that she didn’t believe in the pension system and she wanted to have kids so they could take care of her when she gets old. That was in London.
With the model we are proposing, the cost of pensions will be greatly reduced, but it will not be negligible, so we need to address the question of who should pay for it. Right now, pensions are usually a mix of private and state provision. We suggest that these provisions should mostly come from state coffers and that businesses should be largely relieved from their obligations. When workplace pensions were introduced, employees’ lifespans were on average much shorter than today, so the potentially disastrous long-term consequences of pension schemes were not anticipated. Today, people are living longer in retirement, and therefore expenditure is far greater. As a result, businesses need to make more money (and the current workforce has to work harder) just to remain where they are – some are reaching the point at which even this is no longer sustainable (this is exacerbated by the fall in worth and returns of pension funds’ investments since 2008). Many firms and organisations, in the state and private sectors, have become insolvent or are on the brink of insolvency for this reason. Furthermore, pension funds have no choice but to invest in shares (or government bonds), fuelling further inequality and dependence on the financial sector. Consider co-ops, for example: how could they survive and provide pensions for their former employees without investing in the stock market, which is inimical to their philosophy? Of course, in our proposal, companies and corporations would still make some contributions through the various forms of taxation we’ve discussed, and voluntary (syndicate) workplace pensions can still be put in place. Some employees may agree to collectively put some money aside (as a form of savings) so that they can fully retire when they want. However, this should not be obligatory or affect the state guaranteed entitlements as an integral part of the welfare system, that will also include adequate and comprehensive care when needed. It is hard to see, though, how this can be achieved without abolishing an arbitrary age of retirement, and provide to those who need and when they need.
In the last few decades, and especially since the 2008 crisis, wages (particularly in the UK and the US) have for most people stagnated or fallen in real terms (taking inflation into account). There a number of reasons for this: the reduction in social support has increased fears of being jobless and made workers prepared to work for less; cheap labour in developing countries (outsourcing) as well as immigrants drive wages down; robotisation, reducing the need for especially unskilled and semi-skilled labourers. All these factors are likely to play a role even in post-capitalist society, so we need to address the question of how to determine the right wage.
If you look at this as a business owner, it makes sense to think in terms of supply and demand. For most productive businesses, wages are the biggest expense. And, especially in a highly competitive market, you want to minimise expenses in order to survive as a business. But human beings are not only workers. And society is not only the economy. Human beings cannot and should not be objectified to the extent that they are reduced to their utility for a business. As it is too much to expect many business owners to take this into account in the face of competition, some sort of moderation needs to take place. Historically, trade unions would take on that task, but this would not be ideal in a post-capitalist society as it could create an environment of ‘us against them’, divisions typical for the capitalist society, but not conducive to the promotion of ‘togetherness’. Setting a minimum wage is another way. However, the problem with a minimum wage is that it is static and arbitrary (sometimes going below the living wage – the amount needed to maintain a normal standard of living). If it is set below the living wage, it is pointless; if set much above, it can actually increase unemployment by making workers too expensive. So, what else can be done? Following the Goldilocks zone principle of our economic model, we need to set the boundaries at the bottom and at the top, within which spontaneous economic forces are allowed to operate.
The bottom boundary
If social support is organised along the lines as described above, it would become a natural boundary at the bottom – few would be prepared to work for less (precluding any need to set a minimum wage). Linking social support to social contribution would justify equalling social support with living income, which can be determined by an independent advisory body. This should not be a disincentive for those who receive social support to look for work, as they will need to contribute anyway.
The top boundary
We suggest these ways of securing that wages remain within the Goldilocks zone:
Setting the maximum ratio between the highest and the lowest wages. This would ensure that a wage increase is distributed across the board rather than going only to the management. How wide this zone should be may be open to discussion. As a rule of thumb, it is suggested that the top 10% should not earn, on average, more than five times the amount earned by the bottom 10%, as is, by and large, already the case in Nordic countries. Regarding the earnings within the same work-place, it can hardly be justified that somebody can earn more than 20 times the pay of the average employees. It is just not realistic that their work is really worth more than 20 times of somebody else’s. Let’s use simple maths to make this point. It is commonplace in the US to find CEOs earning 300, 500, even 1,000 times the pay of typical workers in their organisation – those paid at the median salary (not even those at the bottom). Using the lowest of those figures, for the cost of one CEO’s salary you could employ 15 equally qualified professionals, each of whom would be earning 20 times the pay of a typical worker. Can it be true that a single person is worth as much as these 15, or as much as an army of 300 typical employees? In most cases, resolutely no. An Economic Policy Institute report concludes that if CEOs earned less or were taxed more, there would be no adverse impact on output or employment. But what if somebody is a real genius and those 15 would never, individually or collectively, come up with the same brilliant ideas or solutions as that person? Surely, an exceptional individual should be adequately rewarded for his or her contributions? Well, this is why bonuses exist. They should be reserved for special cases and extraordinary contributions as originally intended, rather than being the norm and a form of tax avoidance.
A differential tax for retained profit and for distributed profit (profit given to shareholders) should encourage companies to reinvest, leading to them employing more people or increasing wages. But what if companies invest in robots rather than workers? Robots have many advantages, but have one fatal flaw from an economic perspective: they do not buy and spend. What is the point of production (and robots) if nobody can afford to buy anything? So, it is in the interest of producers to have a population that can buy and spend – and the best way to secure this is to pay them decent wages (reducing prices is another way, but this comes to the same thing, as it increases the value of wages in real terms).
Setting these top and bottom boundaries would allow the advantages of market forces but, at the same time, prevent their excesses. This would benefit the economy as well as society as a whole as it would make sure that inequality, with all its social consequences, doesn’t get out of control.
~ What we can do now ~
- Is it possible to make strides in this respect in other countries beside the Nordic ones that are renowned for their egalitarianism? It seems it is. In 2016, the city council of Portland in the US adopted a new local tax rule that sets a landmark precedent for cracking down on excessive CEO pay. The council agreed to add a surtax to the city’s existing business licence tax for firms that pay their CEOs more than 100 times what their typical worker receives. This is the nation’s first tax penalty for extreme CEO–worker pay gaps. A way to go! This example can be used when lobbying for similar changes in other places.
- Legislation is not the only option: for example, when contracting, preferential treatment can be given to companies that pay their CEOs no more than 25 times their median worker pay level (this is already the case in Rhode Island).
- Trade unions can bring demands tied to pay gaps into collective bargaining.
- Investors can put their investments in mutual funds that screen out corporations with chronic pay-gap excess.
- Even if we are not in a position to do any of the above, as consumers we can shun companies with a huge pay gap (see the previous footnote for some examples).
 Note that this is quite different from the participatory budget that has been piloted in Portugal and other parts of the world. In a participatory budget, people submit ideas on what the government should spend its money on, and then vote on which ideas should be adopted. Even at its best, participatory budgeting seems to have only limited value and can be time consuming and complicated. In contrast, in our proposal taxpayers choose what proportion of their money should be spent on each large category of public spending.
 There are some differences in the meaning of welfare and social security, but for the sake of simplicity these two terms will be used here interchangeably.
 Made by neoliberal politicians on the left (such as the UK former prime minister Tony Blair, and those on the right such as Iain Duncan Smith, ex-minister for work and pensions).
 Paraphrasing George Osborne, a former UK chief finance minister, from his 2012 speech.
 Apparently, some companies already do this; Jaguar Land Rover, for example, use retired workers to pass on their skills and knowledge to young employees.
 For example, the CEO in Marathon Petroleum takes home almost 1,000 times more pay than his typical employee (data from 2017). The ratio in Aptiv and Manpower is even greater: about 2,500:1.